Profit First: Book Summary
When I read the book, I just have to say this, “This guy is amazing.” I run a Freelance Business in the Blog Writing niche. Finance is the place I struggle most but this man makes business finance damn easy! I am not kidding.
Most of the business finance is written by CPAs and accountants for CPAs and accountants. There are quite a few books written by a business owner (a successful one I may add) for business owners on the subject of business finance.
The system is very simple because it’s been refined by Mike (the author of Profit First). Let’s dive into the book,
Four Types of People Working in Business
To understand the money you need to understand the four types of people that work in a business.
The math and logic here are very simple. An employee works for the business and the business pays them for it.
They are also known as freelancers or Commission-Based Employees. Their pay is dependent on your pay. For example, you get a $100 project and you outsource it for $50. The person you outsourced is a subcontractor or freelancer.
Business Owner as an Employee
There are working as employees but there is still a Business Owner (Therefore, don’t mess with them.) . They also get a salary ( to be more specific compensation) for the work they do. This price is not based on their equity/shareholding but it’s a pre-negotiated price.
Business Owner as an Equity Holder
There is something called profit. The company sets aside a percentage of profit for the Business Owners (Equity Holders) in addition to the compensation.
The Money Flow in Business
Let’s say you opened a candy bar (I know you have the capability of much more). You sold a candy worth $200 (not bad). The candies cost you $100. You gained a profit of $100. You are right. No, you are actually wrong. That $100 is not your profit. It’s your revenue. What’s your profit then?
[ Add an infographic here about where the money flows]
The money is then divided into mainly four parts, (Yes, one of them is profit, too).
Let’s say you rented a bag from your friend to sell candies for $20. Yes, it’s an operational expense.
It’s unlikely that government will ask you for tax. It’s okay for now but you will definitely have to give tax one day. (If you are serious about your candy bar).
You are not an employee but working as one. Therefore, let’s for being the top salesman (and only ) for your business your reward is $30.
The left $50 is your profit, hurray. (actually not). It’s your profit but you don’t usually get all. Why? It’s becuase a percentage of it goes back to the business. (The business needs to grow, too). We are taking the percentage to be 50%. Therefore, your profit is $25. Now, you can enjoy it. If you have other equity holders, you can divide the money according to your equity.
Let’s do Profit First Instant Assessment First
It’s time to take your business for a checkup,
Fill the Actual Column-
Top Line Revenue
It simply means the sales for the past 12 months.
Materials & Subs
It is the cost of material to manufacture a product or payment to be made to the subcontractor.
Real Revenue= Top Line Revenue – Materials & Subs
Fill out other headings, too.
Fill the PF% Column
Use the below chart to find out your PF% using your Real Revenue Numbers
Fill the PF$
It’s the amount you should be spending according to the PF% from the PF% chart.
For example, for the Profit cell of the PF$ column,
PF$ of Profit cell = PF% of Profit cell * Real Revenue
Fill the Bleed Column
It tells you how much you are overspending or understanding in a category.
For example, for the Profit cell of the Bleed Column
The Bleed of Profit cell= Actual-PF$
Fill the Fix Column
It tells you whether you should decrease the spending or increase the spending in a category. If the value in the “The Bleed” column is negative, write “Decrease”. If the value in the “The Bleed” column is positive, write “Increase”.
Result of the Assessment
It will tell you which category you need to allocate more and which you need to allocate less.
Conclusion: There is much more to it.
The above assessment and methods are great but the book is damn awesome. It’s a book which will blow your mind. The biggest thing about Mike is “Give to Give”. Most of the author tells you 50% of the awesome things they know in their books. What if you want to know the 100%? You can buy their premium course or one on one coaching session. Mike gives everything he has in his books. In short, he is a “Give to Give”. I mean to say he gives for the sake of giving and doesn’t expect anything in return.
He is one of the best business books writer I have known. I would say, “Go and check out Profit First”